How not to pay too much 4 Calendars?

Discussion in 'Options' started by eldorado1, Nov 26, 2011.

  1. Does Averaging a losing trade work for calendars?

    Tried calendaring up-trending equities, therefore cheaper (low IV) but I end up with low-volume-hard-to-adjust positions.
    I prefer high volume and many expiration months like SPY, GLD and C.

    Any advice on getting a good deal?

    Will appreciate your insight :)
  2. how is trading a calendar lower implied vol?
  3. Averaging works when the underlying cooperates.

    Long spreads achieve lower cost positions (less time premium) not lower IV.

    Playing with low liquidity series gets you hard to adjust positions.
  4. I mean that lower IV stocks have cheaper calendars
  5. Only because the options themselves are cheaper. The price of a calendar is really a function of the term structure of vol. If the termstructure is flat or downward sloping (like this environment) then calendars are cheap relative to their components.

    Generally I believe that averaging is not a good idea. The reason is that if you are long the calendar then a lot of your pnl will come from gamma/theta or vega pnl on the back leg. But when you trade a calendar, you are capping your gamma risk (at the expense of some theta). Everyday however that you are "right" you are making some kind of money. Averaging would only be profitable if the term structure changes enough that you are losing money on your position (a big move in implied vols) or if the spot moves a lot and you are hoping for reversion. The former situation probably will not happen without the latter. So if you are trying to profit by averaging in because you believe in mean reversion you are better off just trading the underlying or adjusting your current position (by unwinding a leg or something).
  6. What I normally do is add a calendar. for example I had a SPY 123 Dec/Jan Calendar and when prices went down I added a 114 Calendar (I did it unusually early, @ 122, cause technical's were looking bearish).
    BUT, lets say I add that second calendar (114) PLUS double the original position (123) which is now cheap? (both strikes will have same amount of contracts) What do you think?

    Edit: @ 122 it would not be cheap to trade the 123 strike but I hope you get the general idea.
  7. It honestly depends on your view. But my experience has been that trading calendars like this to express delta views are poor risk/reward choices.
  8. The delta view I had with SPY is not the issue. as a natural outlook trade I think it has some potential and worth trying out.
  9. What does "natural outlook trade" mean?
  10. Sorry
    #10     Nov 26, 2011